Over the last few years there has been an increase in the number of situations where departments are requesting payment to individuals on a professional contract basis for a variety of services rendered. Some representative service payment requests include honoraria, consultants, entertainment, photography and music accompanists. While this mode of payment may be the simplest and most direct from an administrative point of view, it is not always appropriate. Federal laws are quite specific as to how these payments are to be made. The purpose of this policy is to familiarize departments with the most pertinent aspects of these laws so that they can be applied when making payments of this nature in the future.
There are three established mechanisms available to departments to secure and pay for services rendered. The personnel/payroll process is used when there is an employer/employee relationship. When a consultant/independent contractor relationship exists, a request for payment can be made through the Parnassus system, or a departmental manual check (see procedures in section 2.29) can be used if payment is $500 or less.
To determine whether an individual or firm falls into the category of employee or consultant, the particulars of the service to be performed and associated factors need to be carefully evaluated in each instance. In an effort to assist in making the initial evaluation, the following definitions, examples and procedures have been developed.
2.28.2 When an Employer/Employee Relationship ExistsAn employer/employee relationship exists when the College has the legal right to control or direct both the final results and method of the work or services to be performed; if the College is entitled to control what, where and how the work must be done, the worker must be treated as an employee for withholding tax purposes. The College need not actually exercise control; it is sufficient that it has the right to do so. FURTHER, IF THE SERVICE PROVIDER IS CURRENTLY, OR HAS BEEN RECENTLY, A FACULTY, STAFF OR STUDENT EMPLOYEE OF THE COLLEGE, THEN THE PRECEDENT FOR EMPLOYEE STATUS GENERALLY APPLIES. When an employer/employee relationship exists, the individual must be paid through the personnel/payroll process with appropriate federal and state tax withholdings applied. Guidelines and procedures for this process are covered in the Supervisor's Personnel Manual.
2.28.3 When a Consultant/Independent Contractor Relationship ExistsConsultants/independent contractors may be engaged in those cases where the required knowledge or expertise is not readily available at the College owing to the timing or character of the service request and, where such services are needed for a limited period of time.
A consultant/independent contractor relationship exists when individuals or firms are engaged to perform independently a specific task for a stated rate, or estimated sum of money, performing such duties and having under their control the manner and detail of accomplishing the end result. Consultants may or may not carry out their duties on College premises. Emphasis is on completion of a task or work statement, with the College retaining adequate control over the level and context of work to assure receipt of adequate value for money spent.
To pay a consultant/independent contractor, a properly authorized voucher authorization form with a copy of the executed contract or letter of commitment should be forwarded to the Office of Accounts Payable. In addition to the standard information required on the voucher authorization form, the federal tax identification number and/or social security number of the person or firm performing the services should be included.
To pay a consultant/independent contractor with a department manual check, the vendor information needs to be forwarded to the accounts payable office before the check is issued. The vendor information needs to include the name of the payee, address, and the federal tax identification number and/or social security number of the person or firm performing the services. The executed contract or letter of commitment should be attached to the department copy of the manual check and retained by the department for five years for auditing purposes. Questions about paying consultants/independent contractors with checks should be directed to the accounts payable office.
2.28.4 Factors to be Used in Determining which Relationship ExistsThe Internal Revenue Service's Publication 15A, which can be found at www.irs.gov/pub/irs-pdf/p15a.pdf, describes factors to determine whether an individual is considered an employee or an independent contractor.
In addition to these factors, the IRS will subject the service relationship to a test for employee status under the Fair Labor Standards Act and unemployment and insurance laws; these are broader than the common law test in assessing an individual's "independence" relative to the employer.
Where difficulty is experienced in making such a determination, the College's compensation manager should be contacted for assistance; staff responsible for reviewing departmental and institutional payments to independent contractors and consultants can provide precedent and College-wide perspective to support one's determination.
2.28.5 DocumentationIt is important to support all requests for payment to an independent contractor with proper documentation, including, but not limited to the following:
- Social Security number or alternative tax identification number6
- Payee's address
- Nature of service
- Date(s) service is to be performed
- Where service is to be performed
Payments to an independent contractor in excess of $100.00 should always be supported by a letter of agreement or contract signed by all parties involved. See sample letter of agreement and sample contract. Questions regarding institutional liability issues should be directed to the vice president for finance and administration (607-274-3118).
2.28.6 Special Note on Foreign NationalsThe tax regulations governing payment of foreign nationals are growing increasingly complex. While in general the distinction outlined here regarding the employer/employee status vs. independent contractors will also apply to those persons who are foreign nationals, additional information is required, the College must ensure that proper authorization is in place for a foreign national to provide any services or to work. Before hiring a foreign national individual, please obtain the following from the individual for review by appropriate staff in the Offices of the Payroll or Human Resources:
- A copy of the individual's passport
- A completed Ithaca College Foreign National Information Form, which is available at the www.ithaca.edu/financial_services/forms/fif2.pdf.
The College is required by tax law to report annually to federal and state tax authorities payments to individuals for services rendered. Payments in the form of compensation to Ithaca College employees are transmitted on tax form W-2 and payments to independent contractors are transmitted on tax form 1099. Payments to individuals not properly classified are subject to sanctions for failure to withhold income and employment taxes and may result in assessments to both the employer and the service provider.
6 Effective January 1, 2001, all nonresident aliens must have a social security number. If they cannot get a social security number, they must apply for an Individual Taxpayer Identification Number (ITIN).
Last Updated: June 1, 2006